NATIONAL AFFAIRS: The bubble economy - can it last?

News Weekly, January 8, 2005

Just as St Peter reminded his flock that charity can cover a multitude of sins, so it is (for entirely different reasons) that politicians need reminding that good economic times cover a multitude of political mistakes.

In other words, voter tolerance to political failings often depends on just how well the voter himself is doing.

John Howard is at the zenith of his career and many of his former critics have used the occasion of the passing of Bob Hawke's record as Australia's second longest-serving Prime Minister to sing his praises and re-evaluate the Howard era.

The public have been told of Mr Howard's political invincibility, how his self-discipline has permeated that of government itself, how his political acumen has destroyed all opponents, and how he is rewriting the social landscape in Australia.

Whether all this praise is entirely true, only history will tell.

Jury still out

The jury is still out on whether Howard is simply a brilliant political operator with good conservative instincts, or a leader who will leave a decades-long imprint of his vision on the country he has led.

In any case, Howard's success itself also needs to be put in context. How much, for example, does the booming economy underpin the supposed impregnable Howard political legend?

And how much of it can be attributed to an ineffectual Opposition so riddled by petty ambitions and feuding that it seems totally incapable of coming up with any effective means of attacking the Government or mapping out an alternative platform?

Mr Howard has been fortunate to have held the reins during a period of extraordinary prosperity which has also coincided with the longest uninterrupted period of growth since records have been kept.

Of course, Mr Howard and Treasurer Peter Costello can claim some credit for their good economic management; but the fact is that, in the deregulated world, national governments are having an ever-decreasing influence on their local economies.

Like other Western countries, including Britain and the United States, Australia has benefited from two consecutive periods of asset inflation from the dot.com bubble and the more recent housing bubble.

Both are connected because the world's central banks conspired to deliberately loosen monetary policy to avoid a collapse from the crash.

Their unprecedented measures have kept fuelling the good times, but have left Australians and other Westerners more indebted than they have ever been in history.

Australian national debt has sky-rocketed to $400 billion during the Howard administration, but no one dares complain because the alternative - paying down the debt or stopping the borrowing - is an awfully unattractive option with fearful consequences for business and jobs.

The growth in Australia's foreign debt has been fuelled by the banks, which have been raising around $40-45 billion a year, mostly from overseas, because Australia doesn't save enough.

Mr Costello says the fact that foreigners continue to lend vast amounts of money to Australia, so that we can build more houses, is a "vote of confidence'' in our economy.

But unless all the laws of economics and economic history are suddenly being challenged by the new paradigm, a downturn is certain at some point and the consequences for Australia in particular will be severe.

Mr Costello knows this better than anyone and fears that, if and when he finally takes over as Prime Minister, he will have to carry Australia through tough times totally unfamiliar to an entire generation of Australians.

Globalisation has made the economies of the world interlocked and interdependent to a degree few could have imagined even two decades ago, and the global markets mean change can be extremely rapid.

Massive imbalances

Massive imbalances are building in the world's economy, and logically it follows that global growth can also mean a possible global collapse.

Over the past two and a half decades, Australian governments have trusted the globalists to accept the notion that the world's only country occupying an entire continent does not need a mixed economy, its own manufacturing sector, or to have its key industries which are not owned by foreigners.

Mr Howard says he wants to capitalise on the good times to build an Australian society which rewards effort, and encourages an entrepreneurial spirit.

Few would argue with this goal. The only question is: how long does Mr Howard have to implement his vision?